Friday, November 16, 2012

Longform: Why Did the Twinkie Die?

Back in July David Kaplan did a deep dive into the recent history of Hostess.
From Fortune:

Caught in a fight between labor and hedge funds, the baker may finally have reached its expiration date.
FORTUNE -- Those Twinkies on your cupboard shelf may last forever. But the company that makes them may not.

Hostess Brands -- the owner of such iconic lunchbox snacks as Ding
Dongs, Ho Hos, Suzy Q's, Dolly Madison Zingers, and Drake's Ring Dings,
as well as Wonder Bread and the "Golden Sponge Cake with Creamy
Filling," the 150-calorie food-science marvel called the Twinkie that
drove Woody Harrelson mad in Zombieland -- is in federal
bankruptcy court. Again. It's the second time in a decade -- which is
why bankruptcy wags say the company is in "Chapter 22" rather than
merely Chapter 11. Loaded down, astonishingly, with nearly $1 billion in
debt, privately held Hostess faces oblivion if its creditors, owners,
and unions can't agree on how to restructure.

So far, in a courtroom near Manhattan and in a negotiating room in
downtown Washington, they haven't come close, although a deal could
happen even as you read this. The dramatis personae are
impressive: the Teamsters; two large hedge funds, Silver Point Capital
and Monarch Alternative Capital; and the private-equity firm Ripplewood
Holdings. In an acrimonious behind-the-scenes war -- refereed by a
federal judge -- they wage hostilities over who will get what crumbs
from a disintegrating corporate cookie; whether that business can and
should be resuscitated; the degree to which fabulous pension plans are
anachronistic; whether promises made in collective bargaining ought to
be sacrosanct; and just how important it is to save 15,000 union jobs.
"There aren't great options here," former U.S. House Majority Leader
Dick Gephardt told Fortune. Gephardt is now a lobbyist and
consultant with connections to Hostess and the Teamsters. "People will
have to pick the one that's a little bit better."

The Hostess story is a microcosm of larger economic and political
issues on the national stage, including the perils of debt and the
inertia of unions on workplace reform. It unfolds during an electoral
campaign in which President Obama is seeking to make an issue of the supposed predatory excesses of private investment funds, linking Mitt Romney's career at Bain Capital to the destruction of jobs.

But in truth there are no black hats or white knights in this tale.
It's about shades of gray, where obstinacy, miscalculation, and lousy
luck connived to create corporate catastrophe. Almost none of the
parties involved would speak on the record. Still, it's clear from court
documents and background interviews with a range of sources that
practically nobody involved can shoot straight: The Teamsters remain
stuck in a time warp, unwilling to sufficiently adapt in a competitive
marketplace. The PE firm failed to turn Hostess around after taking it
over. The hedgies can't see beyond their internal rates of return. Et
cetera, et cetera, et cetera.
The critical issue in the bankruptcy is legacy pensions. Hostess has
roughly $2 billion in unfunded pension liabilities to its various
unions' workers -- the Teamsters but also the Bakery, Confectionery,
Tobacco Workers and Grain Millers International Union (which has largely
chosen not to contest what Hostess wants to do -- that is, to get out
of much of that obligation). If the bankruptcy court lets Hostess off
the pension hook -- which often happens in these cases -- it only moves
the struggle outside the courthouse, and the ante goes up. For the Teamsters can then call a strike
-- which its Hostess employees have already ratified by a 9-to-1
margin. If the court doesn't grant relief, Hostess can seek liquidation,
which would mean that some creditors get some money, but equity would
be gone for good, as would a lot of jobs. Either way, each side holds a
nuclear warhead with which to annihilate the company.

It is an exquisite game of chicken, and neither side may change course....MUCH MORE

One fact that I haven't seen elsewhere is the open split between the Teamsters and the AFL-CIO affiliated BCTW-GMIU. It is a complete reversal of positions to that stated immediately above.
From the International Brotherhood of Teamsters:Teamsters: Bakery Workers Should Hold Secret Ballot Vote at Hostess

November 15, 2012

Unannounced Strike Has Put Thousands of Jobs in Jeopardy

(WASHINGTON) – Today, the Teamsters Union announced its
recommendation to the Bakery, Confectionary, Tobacco and Grain Millers
International Union (BCTGM) that a vote of its Hostess members by secret
ballot should be held to determine if the workers want to continue
their strike of the company and force it into liquidation.

On Wednesday, Nov. 14, Hostess Brands indicated that if it couldn’t
resume normal operations by 5 p.m. EST on Thursday, Nov. 15 that it
would have to begin the liquidation process. Teamster Hostess members
and all Hostess employees should know this is not an empty threat or a
negotiating tactic, but the certain outcome if members of the BCTGM
continue to strike. This is based on conversations with our financial
experts, who, because the Teamsters were involved in the legal process,
had access to financial information about the company.

As stated previously, Teamster Hostess members have been frustrated
by numerous missteps by a variety of Hostess management teams, but the
union has tried to engage constructively to find a solution to preserve
jobs. That comprehensive engagement has spanned 18 months....MORE

Irving, TX – November 14, 2012 –
Hostess Brands Inc. announced today that it will file a motion with the
U.S. Bankruptcy Court on Friday to liquidate the entire Company if
enough striking employees do not return to work by 5 p.m., EST, Thursday
to enable the Company to resume normal operations. The strikes were
called on November 9 by the Bakery, Confectionery, Tobacco Workers and
Grain Millers Union (BCTGM).

“We
simply do not have the financial resources to survive an ongoing
national strike,” said Gregory F. Rayburn, the Company’s Chairman and
CEO. “Therefore, if sufficient employees do not return to work by 5
p.m., EST, on Thursday to restore normal operations, we will be forced
to immediately move to liquidate the entire Company, which will result
in the loss of nearly 18,000 jobs. It is now up to Hostess’ BCTGM
represented employees and Frank Hurt, their international president, to
decide if they want to call off the strike and save this Company, or
cause massive financial harm to thousands of employees and their
families.” ...MORE